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“The lira weakened sharply today after the central bank removed a key sentence from its statement which earlier promised that the CB would carry out additional monetary tightening if required,” note Commerzbank analyst Tatha Ghose.

Key quotes

“it is confusing to see CBT sticking to a pre-existing narrative that inflation will gradually moderate during H2 2019 and allowing that narrative to determine its message. What is more confusing, CBT highlighted the increasing inflation risk from import prices in its statement – but, this did not deter policymakers from making the dovish change that they did.”

“Granted, we do not take the removal of that sentence as sacrosanct and irreversible: despite that change, CBT will tighten when the time comes – but, the timing of the change confirms that the MPC is not psychologically ready for tightening. Sensing this, the market may well be tempted to test the central bank further. “

“It is not clear to us whether the Turkish central bank views this as a situation where it must promptly cut off all negative feedback loops and stabilise the lira, above all else and without consideration to any other priority, or it still views it as a ‘normal’ situation where it can gradually adjust its policy and language following pre-existing medium-term inflation projections. A relaxed policy attitude in the current circumstances could prove to be a costly mistake.”